After a two-year pause, the Reserve Bank of Australia has resumed raising interest rates. On 3 February 2026, the RBA Board voted unanimously to increase the official cash rate by 25 basis points to 3.85%, marking its first tightening move since early 2024.
The decision reflects a hardening reality: inflation is not cooperating. Annual consumer price inflation stands at 3.8%, stubbornly above the RBA's target band of 2-3%. The largest price increases are concentrated in housing (up 6.8%), food and non-alcoholic beverages (up 3.1%), and recreation and culture (up 3.7%). The underlying inflation measure, trimmed mean CPI, sits at 3.4%, also above target.
What changed to prompt this turnaround? Private demand proved significantly stronger than expected in late 2025. Household spending and business investment both accelerated, adding heat to an economy already facing capacity constraints. Governor Michele Bullock described the inflation situation plainly at the subsequent press conference: the inflation pulse is too strong.
The immediate impact on Australian households is tangible. For a homeowner with a $500,000 variable-rate mortgage, the 0.25% increase translates to roughly $79 more per month. On a $600,000 loan, repayments climb by approximately $90. Multiply that across the 4.8 million Australians carrying home loans, and the aggregate effect is substantial. Early analysis suggests that over 1 million mortgage holders could now be in financial stress, where loan repayments consume an unsustainable share of income.
But here is where the centre-right scepticism about rate rises meets pragmatic reality. Yes, tighter monetary policy slows borrowing and investment, constraining economic growth. Higher debt servicing costs hurt households already stretched by rent, childcare and grocery bills. These are genuine costs, and they fall disproportionately on those with least capacity to absorb them.
Yet there is a competing truth: permitting inflation to drift higher risks becoming entrenched, requiring even steeper rate rises later. The RBA has learned this lesson from 2021-2022, when persistently underestimating inflation forced aggressive tightening that ultimately caused greater pain. A modest, controlled adjustment now may prevent a sharper correction later.
The RBA itself has signalled more moves are coming. Commonwealth Bank economists expect another 25 basis point rise in May, taking the cash rate to 4.1%. This assumes inflation remains sticky. If the data shifts, the RBA has left itself optionality; Governor Bullock emphasised that the central bank is data-dependent and will not mechanically march rates upward.
The uncomfortable truth is that Australia faces a genuine policy dilemma. Inflation is real and above target. Capacity is tight. Demand remains strong. But households are stretched, mortgage stress is rising, and growth is slowing. There is no outcome that avoids pain entirely. The question is whether this measured tightening cycle, executed transparently by an independent central bank, represents the least-bad path through that constraint.